Planning a second property as investment? Things to ensure before making the plunge

• Rental income can be a good way to earn a regular passive income.
  
• Demand and appreciation are subject to market fluctuations.
  
• Local factors may result in property values not always increasing.
  

Having a property to rent out seems a pretty good proposition. It gets you a regular passive income, over and above your earnings.
However, it is not that simple. Here, we will take a look at whether it makes sense to go for a second property to get a rental income and as an overall investment.

Rental income: An attractive proposition

Earning a steady rental income via renting tops the list of several investors.

“It not only gives a sense of security to many buyers to own a property but also makes the property more lucrative with decent returns,” says Anuj Puri, Chairman, ANAROCK Group, a real estate services company.

The other reason why many investors nowadays prefer to buy for rental purposes is because besides providing them a steady rental income, it also helps in keeping the property under use and therefore can be maintained.

Investors can pay off a part of their mortgage with the rental income received from tenants and also enjoy both rental and property value appreciation in future.

There is a also good possibility of receiving tax benefits including municipal taxes, and deductions on payment of principal and interest.

Challenges to be aware of

One should keep in mind that purchasing a property is a substantial initial investment. One would need to pay a down payment and EMIs or Equated monthly instalments on the property and that may fall way short of taking care of the mortgage.

According to Global Property Guide, average gross rental yield in India stands at 4.54%. By definition, rental yield refers to the annual rental value received from an income-generating asset, as a percentage of the property's value.

This means that there can be a big gap between the EMI you pay and the rent you receive. For example for a property in a prime location in Mumbai which costs ₹3 crore, your EMI would be around ₹2.5 lakh at 8.40% interest. The rental income on the other hand would be in the range of ₹50,000- ₹80,000.

Besides, rental demand and appreciations are subject to market fluctuations and local factors and property values may not always increase. In addition to this, you may run the risk of having vacant periods and finding good, reliable tenants can also be challenging.

Managing a rental property is also time-consuming as you may require to deal with tenants, maintenance and repairs. “Managing a rental property is also time-consuming as you may require to deal with tenants, maintenance and repairs,” says Altaf Ahmad, CBO & Co-Founder, Azuro, a rental and property management firm, owned by Square Yards, a real estate marketplace.

Besides, rental demand and appreciations are subject to market fluctuations and local factors and property values may not always increase. In addition to this, you may run the risk of having vacant periods and finding good, reliable tenants can also be challenging.

Rental growth across cities

1BHK


2BHK




3BHK


Source: Square Yards

What to keep in mind before buying for renting out?

“When investing in a home for rental income, one must consider the potential rental income the property can generate. Location is one of the most critical aspects to keep in mind while buying an asset for rental income, as that determines rental value and reaps a good resale prospect in the future,” says Anshuman Magazine, chairman and CEO, India, SEA, MEA, CBRE, a real estate services firm.

It is important to evaluate the neighbourhood, infrastructure, and accessibility. Another key consideration should be enhanced amenities like schools, hospitals, and retail spaces, which are significant for tenants and help maintain asset value in the long run. These features play a pivotal role in ensuring the success of an investment.

In a good location, the owner will also not find it difficult to find new tenants when previous tenants vacate.

“Besides , one should also look to buy from a large and listed developer because most of the time to capitalise on the best rates, an investor buys the property when either newly launched or when under construction. Since most large builders today focus on timely delivery it will eventually help the investor in putting up the property on rent on time,” says Puri.

However, getting a property by a prime developer in a good location will require a huge upfront cost in terms of down payment and also servicing large monthly EMIs.

Additionally, the return on investment may not be as high as other investment options, such as stocks or bonds. So it is a decision that one needs to take after carefully evaluating one’s finances and the pros and cons.